A Manhattan Project-era business model is responsible for a $1.7 billion dollar tab that taxpayers will have to pick up next year to cover ballooning pension liabilities for the national labs.

GAO report

GAO report

As more scientists and engineers become eligible for retirement, future liabilities represent potentially billions of dollars more, according to a report released the last day of May by the Government Accountability Office. The findings reveal that the Department of Energy has been lax in examining other post-retirement costs, such as health care, which factor into the overall reimbursements DOE makes to contractors like Bechtel, Babcock and Wilcox, URS, and Lockheed Martin, which manage operations at national labs like Los Alamos and Sandia here in New Mexico.

The DOE’s operating structure is unique among government agencies in that about 90 percent of its budget is spent on contracts to operate its facilities. The GAO compared that to NASA, which spends only about 8 percent, and the National Institutes of Health that allocates about 1.5 percent to contractor-operated facilities annually.

In what would be viewed as an unprecedented business arrangement in the private sector, the DOE not only pays for-profit contractors to manage operations and innovation at its 21 national labs and technology centers around the country, but it also reimburses these enterprises for pension costs. While the GAO report cites some progress by DOE in compiling data on its pension liabilities to these contractors, it also chides the Energy Department for failing to try and get a handle on other post-retirement costs that are accrued in addition to pensions.

Further compounding the issue is that DOE repeatedly has failed to accurately communicate these pension and retirement reimbursement liabilities to Congress, which could impact funding decisions made on Capitol Hill.

“Moreover, DOE has not added information to its budget request on its contractors’ nonpension postretirement benefit costs,” according to the GAO document. “While contractor pension costs have risen sharply since 2009, the cost of other postretirement benefits is also significant and growing.”

The GAO report indicates that DOE may be at risk of being able to adequately fulfill its core mission in light of the escalating pension and post-retirement liabilities.

“By not including an explanation of these costs (post-retirement benefits) in its budget request, DOE is not providing Congress with complete information on the full cost of its contractor retirement benefits and their potential impact on the resources DOE has available to accomplish its mission work,” the report concludes. “As a result, Congress lacks important information that could inform its annual funding decisions.”

DOE reimbursements for contractor pension contributions and other post-retirement payments have steadily increased over the last decade. In fiscal year 2000, pension reimbursements were $58 million and post-retirement benefits came in at $205 million. Whereas projections for fiscal year 2012 put pension costs at $1.695 billion and post-retirement benefits at $526 million.

Until the middle of the last decade, most contractors offered workers a defined benefit pension plan whereby the employee was guaranteed some percentage of salary in retirement. As with much of the private sector, the shift was made to defined contribution retirement plans. While that shift has contributed some degree of volatility, as the GAO sees it, DOE has not done enough to exert its influence over contractor pension and benefit costs through stepped up oversight efforts.

“DOE nevertheless ultimately bears the investment risk incurred by the contractors. Moreover, external factors beyond both DOE’s and the contractors’ control, such as economic factors and changes in statutory requirements, can significantly affect benefit costs,” the GAO said. “Still, the department (DOE) will ultimately have to reimburse the cost of contractor pension benefits that have already been accrued.”

The GAO report does note that as the economic downturn deepened in 2008, the DOE did move to get a better management handle on benefit costs—particularly contractor pensions—but warns that gaps remain in its approach. Those gaps involve a lack of clear, standardized measures that DOE program offices can use to evaluate contractor reimbursement requests.

“Without standard guidance for its program offices, DOE is unable to ensure that its offices are deciding on contractor requests on the basis of consistent criteria reflecting department wide goals for managing contractor pension costs,” the GAO report points out. “As a result, program offices may not systematically consider both near-term mission needs and potential spikes in future reimbursement costs when reaching their decisions.”

The author of the GAO report, Mark Gaffigan, recommended four steps for the Secretary of Energy to implement in order to get better oversight and control of both pension and post-retirement benefit costs. In its response to the GAO report, DOE did agree with three of the four recommendations, which include providing Congress with more information during its annual budget deliberations; provide additional oversight in relation to post-retirement benefit costs; and clarify existing guidance on correcting contractor benefit packages that exceed DOE’s standard.